Structural Supply Gap in AI Networking Silicon Widens Into 2027
TREE NEWS reports: Digital signal processors (DSPs) for 1.6T optical modules face a structural supply deficit that will persist at least until the second half of 2027, according to the findings of an expert call on optical communication chips organized by Nomura on September 22 with an AI infrastructure service provider. The imbalance stems from insufficient 3-nanometer process capacity and low yields, not from a temporary swing in demand.
The numbers are stark. Demand for 1.6T DSPs is expected to exceed 20 million units in 2026, while actual shipments will reach only 16 million to 17 million — a shortfall of roughly 3 million to 4 million chips. In 2027, the gap widens dramatically: demand climbs to 60 million to 70 million units against supply of just 40 million to 50 million, leaving a deficit of more than 20 million units. Meaningful capacity release is not expected until the second half of 2027, making the shortage structural rather than cyclical.
800G and 1.6T Diverge Sharply
The supply-demand trajectories for 800G and 1.6T DSPs are moving in opposite directions. 800G DSP shipments totaled roughly 25 million to 26 million units in 2025, are expected to approach 50 million in 2026, and could jump to 120 million to 150 million in 2027, with incremental demand coming not only from AI data centers but also from a telecom market entering a replacement cycle. Because 800G DSPs use 7nm and 5nm processes, supply is relatively ample.
For 1.6T, the constraint is the 3nm node, where capacity is tight and yields remain low. Additional technical hurdles compound the problem: some forward error correction (FEC) algorithms have defects still awaiting fixes, and compatibility issues persist between high-speed DSP interfaces and network switches.
Competitive Moats Keep Prices Firm
High-end DSP competition is not following the usual price-war script. Extremely expensive advanced-node tape-outs, customer qualification cycles of roughly two years, and complex signal-processing algorithms have concentrated market share among incumbent suppliers. Prices are drifting mildly lower rather than collapsing.
800G DSP long-term agreement (LTA) prices currently range from $45 to $70, while 1.6T DSP LTAs run $120 to $150, with retail prices 10% to 20% above contract levels. In 2027, 800G contract prices are expected to fall about 10%, while 1.6T prices should decline less because the supply gap is larger. In China, Sitrus Technology and Joywell Semi are developing 800G DSPs but have yet to achieve volume shipments.
Co-Packaged Optics Shift Value to TIA and Driver Chips
The evolution toward near-package and co-packaged optics (NPO/CPO) is redistributing value along the supply chain. Under NPO/CPO architectures, the DSP is removed to cut power consumption, with equalization and error-correction functions migrating partly to transimpedance amplifiers (TIAs) and driver chips and partly to switch silicon. This places higher linearity demands on those components. Leading TIA and driver vendors have already achieved 200G-per-channel production, with 400G still in development; the main barriers are achieving high linearity, low noise, and low power simultaneously. Because TIAs and drivers can use mature 28nm processes, Chinese vendors have reached volume production at 100G and are sampling 200G, though they still lag overseas peers on product stability and customer qualification timelines.
Google has adopted 2.4T coherent-lite transceivers in its tensor processing unit (TPU) and optical circuit switch (OCS) networks, using a single fixed O-band wavelength over distances of 2 to 20 kilometers. The technical barrier for coherent-lite DSPs is lower than traditional coherent DSPs but higher than standard PAM4 DSPs.
Investor Takeaways
- Watch the first half of 2027 as the key verification window. Quarterly results from major DSP suppliers and optical module shipment data will be the critical checkpoints before capacity release.
- The thesis would weaken if: 2027 1.6T supply exceeds 40 million to 50 million units, DSP price declines significantly exceed the roughly 10% contract-price assumption, or NPO/CPO adoption accelerates enough to compress DSP demand earlier than expected.
- Incumbent DSP suppliers retain pricing power given high switching costs and long qualification cycles, making them relatively defensive within the AI infrastructure supply chain.
- TIA and driver chip makers are the structural beneficiaries of the NPO/CPO transition, though Chinese vendors still trail on stability and qualification.
